Admin

New Blog

Subscribe w/Newsgator

Google Search

Feb 08, 2006

Open Source innovation vs. commoditization

Matt Asay took me to task for a comment I made at the Enterprise Software Summit this week:

"and had Jeff Nolan
(Director of the Apollo Group at SAP and former VC with SAP Ventures)
challenge open source as a tired commoditizing play. He's right. It
really is dull if all open source can do (or, rather, what open source
commercial enterprises tend to do, commoditize big, existing markets)."

I thought about this when I read it and replayed the exchange we had during his presentation wondering if I was really saying that. Short answer is that I am but not in the way Matt suggests, and I'm not even sure I'm talking about commoditization.

Matt was suggesting that there is a wave of open source enterprise application companies on the horizon and that they will offer the potential of displacing the incumbants. That could be one scenario. The comment that I made is that nobody in the enterprise world really gives a shit about whether an app is open source or not if the application doesn't solve their problem. This is the problem that applications like SugarCRM are facing, first they have to build a good CRM application as the entry fee to the market, then they can blather on about open source all they want. If Sugar doesn't build a good CRM app then what is the incentive for anyone to 1) select them over someone else who has a functional app, or 2) displace an existing vendor from the account.

The point about displacing existing solutions is an incredibly important one because if you spend a lot of money on a traditional enterprise application like Siebel you are looking at that as an investment that you will use for future benefit. It's far different than saying "well I think I'll use Microsoft Money instead of Quicken because it's a lot cheaper".

The point at which enterprise software vendors are really in trouble is when their customers start looking at that license/services/support expense as a sunk cost... it's gone and not coming back so there no reason to stay on the current path. I don't see any indicators that would support this today, but it's a real possibility that the entire industry needs to be aware of, and for that matter actively create conditions that result in better applications cheaper.

We love open source, we're big supporters of MySQL, we invested in Red Hat, Sistina, Zend, and most recently Socialtext. SAP was the first major application vendor to officially support Linux as an application platform, and we continue to do things like add development support for Eclipse in NetWeaver. All of the investments in OSS we made were predicated on having an economic model on top of a solid application, the fact that they are open source really was not a factor in our investment decisions.

It's somewhat ironic that Matt uses Socialtext as an example of a company creating a new market, which I really have to disagree with. Socialtext is using wiki technology to disrupt the existing market for collaboration and knowledge management software, in other words a market that already exists but is poorly served. Commoditization also implies a loss of pricing control, which is something that Socialtext is not experiencing as a result of their success... if anything success in enterprise software actually creates pricing power.

Far too many open source application companies think that the reason why enterprise prospects will get excited about them is because they are less expensive than proprietary apps. No, everyone is cost conscious but I don't know a single enterprise class buyer that would simply do a price analysis as the sole determiner in their buying process. The app has to fit their functional requirements in order to win, and if it doesn't then it has to fit a strong portion of their functional requirements and be priced accordingly so that the effort to make it a 100% fit is manageable.

This is where Vinnie or Dennis jump in about out-of-control enterprise implementations that piss away customer dollars. I'll wait. Okay, for every one of the high profile ERP/CRM/SCM projects that failed there are hundreds - thousands - of implementations that are delivered on time and work as promised. If it weren't the case we wouldn't be in business today. (BTW, I'm not picking on Dennis or Vinnie, I have abundant respect for their points of view and agree with them on many points).

The next thing that OSS proponents say is that you get all the source code... big whoop, we've been doing that for the 15 years (if not longer). That's right, you buy R/3 and you get the source code. There might be warranty or support agreement issues if you go mucking around in it, but so are there with Red Hat.

Community developer support is next up. The reality is that the great bulk of OSS projects have a couple of developers and that's it. The biggies has teams of developers and quite often they work for the same company. There are literally thousands of developers on SAP, Oracle, Peoplesoft, Siebel, etc... hell, you can even find an entire community of developers around AS/400 software and IBM hasn't sold one of those boxes in years.

My comment to Matt on Monday was that going out and creating an OSS company for ERP is fighting yesterday's war. I'd be more interested in seeing someone go out and build something better than ERP/CRM/SCM/whatever and use the open source community process to do that. Innovation means going beyond where the market is today, it doesn't mean simply doing the same thing cheaper or differently.

Comments

I agree with you what he proposes is not innovation - to me web 2,0, telemetry, bio metrics, predictive analytics are innovation. But ... ERP is not innovative today with SOA or not. SCM is not, CRMM is not. They are 20, 15, 10 year old concepts. You, Oracle, Siebel recouped your core investment costs a long time ago and still want to charge "innovation" pricing. In doing so you are opening the door for more "utility" pricing. Open source, SaaS, third party maintenance, offshore implementation are all symptoms of that.

They are not playing the innovation card. They are playing the efficiency card.